Link to Fitch Ratings' Report: Volgograd Region - Rating Action ReportFRANKFURT/MOSCOW/LONDON, February 07 (Fitch) Fitch Ratings has revised Volgograd Region's Outlooks to Negative from Stable and affirmed its Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BB-', Short-term foreign currency IDR at 'B' and National Long-term rating at 'A+(rus)'. The region's outstanding RUB14.1bn senior unsecured domestic bonds (ISINs RU000A0JQWF4, RU000A0JRGR0, RU000A0JS7P1, RU000A0JTXF6, RU000A0JU6P9) have been affirmed at Long-term local currency at 'BB-' and National long-term at 'A+(rus)'. KEY RATING DRIVERS The Outlook revision reflects the following rating drivers and their relative weights: High - Volgograd region's direct risk increased to 57% of current revenue at end-2013 from 39% a year earlier. Fitch expects further growth of the region's direct risk to above 60% of current revenue by end-2014. The federal government's election pledges to raise public sector salaries will continue to fuel growth of operating expenditure, while revenue growth will not return to pre-2012 levels due to economic slowdown. This will result in continued deficits being covered by more borrowings. - Volgograd Region's debt coverage and debt servicing ratios are at unsustainable levels due to operating deficits or low operating surpluses. This implies the region has to service part of its debt with new borrowings. Fitch forecasts that the ratios will remain weak in the foreseeable future. - The region had low liquidity of RUB0.7bn as of 1 January 2014 versus RUB7.9bn of maturing debt in 2014, resulting in limited flexibility and a reliance on incurring further debt. However, Fitch does not expect the region to face difficulties in refinancing. Medium - The region's preliminary budgetary performance in 2013 was weaker than expected with operating balance at a negative 3.4% of operating revenue (2012: positive 2.4%). Deficit before debt variation widened to 16% in 2013 from 12% in 2012. Fitch expects minor improvements of operating balance to 2-3% of operating revenue in 2014-2016. However, the operating balance will remain insufficient for debt servicing needs. Volgograd Region's ratings also reflect the following key rating drivers: - Fitch estimates the region's immediate refinancing needs as moderate at 24% of direct risk in 2014 and at 28% in 2015. Overall, the administration has improved debt management by reducing its reliance on short-term bank loans in favour of federal budget loans with low interest rates, medium-term bank loans and bond issuance. - The region's has an industrial economy, which provides a strong tax base but leads to high revenue volatility and concentration as the 10 largest taxpayers contributed 47% of total tax revenue in 2012. Gross regional product per capita was 88% of the national median in 2011. - The ratings are negatively affected by the evolving nature of the institutional framework for local and regional governments (LRGs) in Russia. It has a shorter track record of stable development than many of its international peers. The predictability of Russian LRGs' budgetary policy is constrained by the continuous reallocation of revenue and expenditure responsibilities within the government tiers. RATING SENSITIVITIES Growth of direct risk above 70% of current revenue or low operating balance insufficient for interest payments would lead to a downgrade. Contact: Primary Analyst Behruz Ismailov Associate Director +7 495 956 99 80 Fitch Ratings CIS Ltd 26 Valovaya Street Moscow 115054 Secondary Analyst Vladimir Redkin Director +7 495 956 7084 Committee Chairperson Guido Bach Senior Director +49 69 768076 111 Media Relations: Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email: julia.belskayavontell@fitchratings.com; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com. Applicable criteria, 'Tax-Supported Rating Criteria', dated 14 August 2012, and 'International Local and Regional Governments Rating Criteria', dated 9 April 2013, are available on www.fitchratings.com. Applicable Criteria andALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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